The Group is exposed to various market risks with particular reference to the risk of price oscillations for commodities being bought and sold, interest rate risks and foreign exchange risks to a lesser extent. To reduce the exposure to within the defined limits, the Group enters into contracts drawn up on the basis of types offered by the market.
Foreign exchange risk
The Group is not particularly exposed to this type of risk, which is concentrated in the conversion of the financial statements of its overseas subsidiaries.
As regards the 20 billion yen Private Placement, the exchange rate risk is hedged through a cross currency swap described in the section on interest rate risk.
Commodity price risk
The Group is exposed to variations in the price of electricity, which can have a significant effect on results.
To reduce this risk, the Group adopts a control structure that analyses and measures exposure to market risk in line with the Guidelines of ACEA’s Internal Control System and with the general Risk limit criteria of the Energy Industrial Area.
Risk analysis and management is performed according to a Risk Management process which involves the execution of activities throughout the entire year, on the basis of different frequencies (annual, monthly and weekly). The execution of those activities is distributed between the Risk Control Unit and the Risk Owners. In particular:
- the measurement of risk indicators, or limits, that must be observed in the management of the portfolio, are defined on a yearly basis. These activities are performed by the Risks Committee, which approves the Risk Control proposal;
- the Risk Control unit is responsible for checking exposure to market risks of companies in the Energy segment and for ensuring compliance with defined limits on a monthly basis. When requested by the Internal Control System, Risk Control is responsible for transmitting to ACEA S.p.A.’s Internal Audit Unit the requested information in an appropriate format.
The risk limits of the Energy segment are defined in such a way as to:
- minimise the overall risk for the entire segment;
- ensure the necessary operational flexibility for commodity procurement and hedging activities;
- reduce the possibility of over-hedging deriving from changes in likely volumes for the definition of hedging.
The Market risk is broken down into Price Risk, i.e. the risk relating to the change in commodity prices, and the Volume Risk, i.e. the risk relating to changes in volumes actually sold compared with volumes forecast in sales contracts with end users (sale profiles). The aim of risk analysis and management is generally that of ensuring that financial objectives of the ACEA Group are achieved; in particular:
- protecting the First Margin against unexpected and unfavourable short-term shocks in the Electricity and Natural Gas market that can have an impact on revenues or costs;
- identifying, measuring, managing and reporting exposure to risk of the company ACEA Energia;
- reducing risks through the drafting and application of adequate internal controls, procedures, information systems and competencies.
- entrusting the Risk Owner with the task of proposing suitable operational strategies for single risks, within predetermined minimum and maximum levels.
The assessment of exposure to risk entails the following activities:
- aggregation of commodities and architecture of the risk books;
- careful analysis of hourly patterns of purchases and sales, contained open positions, i.e. exposure of physical positions for purchase and sale of single commodities, within predetermined volumetric limits;
- creation of reference scenarios (prices, indexes);
- calculation of risk indicators/metrics (volumetric exposure, VAR, portfolio PAR, price range);
- checks on observance of existing risk limits.
Interest rate risk
The ACEA Group’s approach to managing interest rate risk, which takes the structure of assets and the stability of the Group’s cash flows into account, has essentially been targeted, up to now, at hedging funding costs and stabilising cash flows, in such a way as to safeguard margins and ensure the certainty of cash flows deriving from ordinary activities.
The Group’s approach to managing interest rate risk is, therefore, prudent and the methods used tend to be static in nature.
A static (as opposed to dynamic) approach means adopting a type of interest rate risk management that does not require daily activity in the markets, but periodic analysis and control of positions based on specific needs. This type of management therefore involves daily activity in the markets, not for trading purposes but in order to hedge the identified exposure over the medium/long term.
ACEA has, up to now, opted to minimise interest rate risk by choosing a mix range of fixed and floating rate funding instruments.
As previously noted, fixed rate funding protects a borrower from cash flow risk in that it stabilises financial outflows, whilst heightening exposure to fair value risk in terms of changes in the market value of the debt.